Gold Spikes on the Saudi Oil Attacks: Can It Last? / Commodities / Gold & Silver 2019

On the weekend, there was a drone attack against theworld’s largest oil processing facility and a major oilfield in Saudi Arabia.Oil prices have predictably spiked, but how will this geopolitical shock affectthe gold market in the days ahead?

WhatHappened?

On Saturday, the drone bombings struck the Abqaiqoil-processing plant and the Khurais oil field in Saudi Arabia. Both areimportant facilities operated by Saudi Aramco, the world’s largest oil producer.Nobody was injured, but the strikestriggered large fires, disrupting the global oil supply.

The Houthis, the Iran-backed rebel army that has beenfighting a Saudi-led military coalition in Yemen, claimed responsibility forthe attack. However, for some people the sophistication of the attacks is thereason to believe that Iran is the one truly responsible.

Is It a BigDeal?

Yes. Although many drone assaults have crippled SaudiArabia’s oil industry in recent months, the Saturday’s attack were the mostdamaging. You see, Abqaiq is the world’s largest oil processing facility, whereabout two-thirds of the total Saudi supply is refined. So, the attack knockedout 5.7 million barrels of daily oil production, or about 5 percent of globalproduction. It implies the biggest oil shock since 1945 (in absolute terms). Asyou can imagine, this event hadsignificant impact on the oil prices. Indeed, the Crude Oil Brent havejumped from $60 to $68, or more than 13 percent, which was the biggest dailysurge since January 14, 1991 during the First Gulf War. Meanwhile, the CrudeOil WTI prices have soared from $55 to $61, or more than 11 percent, as thechart below shows.

Chart 1: Crude Oil WTI prices from September 13 toSeptember 17, 2019

Implicationsfor Gold

The attacks disrupted the global oil supply andrevealed just how much the world’s energy infrastructure is really vulnerable.They also raised concerns about the escalation of tensions in the Persian Gulf.Not surprisingly, we have seen a flightto safe haven assets such as gold. As theconsequence, the price of gold jumped over the weekend above $1,500 again.

Chart 2: Gold prices from September 15 to September17, 2019.

But what we can expect next for the gold market? Well,the attacks can have a twofold  positiveeffect for the gold prices. First, the disruptions in the global oil supplycould result in the oil shock, which could slow economic growth and raise inflation – just likein the 1970s. However, the impact should be temporary and likely to vanish whenthe oil supply is restored. Investors should remember that the world is now much better prepared to deal with oil shocks. Thespare capacity and reserves are higher and President Trump has alreadyauthorized the release of oil from the Strategic Petroleum Reserve, if needed.So we should not see oil and gas shortages as in the 1970s.

Second, theattacks on Saudi Arabia can have important geopolitical implications.President Trump has already announced that the U.S. were “locked and loaded” tohit back after the strikes. Some U.S. politicians flat out called for attackingIran. If the U.S. engages in another military conflict in the Gulf, the safe-haven demand for gold could rise.

However, investors should remember that geopolitical events very often have merely short-livedeffects on the gold prices. For example, the already mentionedFirst Gulf War failed to make gold rallying. Actually, the presence of the U.S.army in Saudi Arabia significantly reduced risks in the Middle East, which lead– after an initial spike – to the drop in the gold prices, as the campaignturned out to be successful. Similarly, thepresent tensions do not necessarily have to boost gold prices. Wednesday’s FOMC meetingcould have a larger impact on the gold market. Stay tuned!

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Arkadiusz Sieron
Sunshine Profits‘ MarketOverview Editor

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